Sovereign Bailouts and Senior Loans

30 Pages Posted: 20 Apr 2016

See all articles by Christophe Chamley

Christophe Chamley

Boston University - Department of Economics

Brian Pinto

Independent

Date Written: August 1, 2012

Abstract

Institutional lending in crisis is evaluated from a theoretical point of view. First, the share of senior loans in new loans is irrelevant under a given probability distribution of the country's resources. Second, seniority may partially alleviate the inefficiency of debt contracts when the distribution of resources is endogenous to the country's physical investment and effort towards success. Third, with multiple lending rate equilibria, institutional lending may induce a switch to a lower private loan rate if it can be done in a sufficiently large amount. Fourth, conditions are analyzed under which debt forgiveness is efficient under a financial shock.

Keywords: Debt Markets, Bankruptcy and Resolution of Financial Distress, Economic Theory & Research, Financial Intermediation, External Debt

Suggested Citation

Chamley, Christophe and Pinto, Brian, Sovereign Bailouts and Senior Loans (August 1, 2012). World Bank Policy Research Working Paper No. 6181. Available at SSRN: https://ssrn.com/abstract=2135413

Christophe Chamley (Contact Author)

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States

Brian Pinto

Independent ( email )

No Address Available

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